BAGHDAD, Iraq (CNN) -- Iraqi officials Monday condemned the weekend killings of eight civilians during a Baghdad street battle involving American security contractors and said they would shut down Blackwater, the company involved.

A Blackwater helicopter hovers over Baghdad in July 2005.

Blackwater said its employees acted in self-defense. The U.S. State Department said it plans to investigate what it calls a "terrible incident."

Secretary of State Condoleezza Rice called Iraqi Prime Minister Nuri al-Maliki to express regret for the weekend killings, both governments said.

In addition to the fatalities, 14 people were wounded, most of them civilians, an Iraqi official said.

Sunday's firefight took place near Nusoor Square, an area that straddles the predominantly Sunni Arab neighborhoods of Mansour and Yarmouk.

The ministry said the incident began around midday, when a convoy of sport utility vehicles came under fire from unidentified gunmen in the square. The men in the SUVs, described by witnesses as Westerners, returned fire, the ministry said.

Blackwater's employees were protecting a U.S. official when they were hit by "a large explosive device, then repeated small-arms fire -- and to the point where it disabled one of the vehicles, and the vehicle had to be towed out of the firefight," said Marty Strong, vice president of Blackwater USA.

A senior industry source said Blackwater guards had escorted a State Department group to a meeting with U.S. Agency for International Development officials in Mansour before the shootings.

A car bomb went off about 80 feet (25 meters) from the meeting site and the contractors started evacuating the State Department officials, he said. A State Department report on the attack said the convoy came under fire from an estimated eight to 10 people, some in Iraqi police uniforms.

The guards called for backup, at one point finding their escape route blocked by an Iraqi quick-reaction force that pointed heavy machine guns at one vehicle in the convoy. A U.S. Army force, backed by air cover, arrived about half an hour later to escort the convoy back to the Green Zone, the report states.

A team from another security company passed through the area shortly after the street battle.

"Our people saw a couple of cars destroyed," Carter Andress, CEO of American-Iraqi Solutions Groups, told CNN on Monday. "Dead bodies, wounded people being evacuated. The U.S. military had moved in and secured the area. It was not a good scene."

An Interior Ministry spokesman, Brig. Gen. Abdul Kareem Khalaf, said, "We have revoked Blackwater's license to operate in Iraq. As of now they are not allowed to operate anywhere in the Republic of Iraq. The investigation is ongoing, and all those responsible for Sunday's killing will be referred to Iraqi justice." Watch why the Interior Ministry revoked Blackwater's license »

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Company and State Department officials said they had not been notified of any order to that effect.

Rice and al-Maliki agreed to conduct "a fair and transparent investigation into this incident" and punish those responsible, the prime minister's office said.

The Diplomatic Security Service has launched an official investigation, a review that will be supported by the Multi-National Forces-Iraq, State Department spokesman Sean McCormack said.

"The secretary wants to make sure we do everything we possibly can to avoid innocent loss of life," he said.

McCormack said that while the United States tries to avoid innocent casualties, "we are fighting people who don't play by any rules" and have no problem killing innocent civilians.

The weekend's incident raised concerns in the U.S. Congress about the use of private security guards. Rep. Henry Waxman, whose House Oversight and Government Reform Committee held hearings on contractor operations in February, said he will hold new hearings into the issue in light of Sunday's shootings.

"The controversy over Blackwater is an unfortunate demonstration of the perils of excessive reliance on private security contractors," said Waxman, D-California.

Blackwater, founded in 1997 and based in Moyock, North Carolina, is one of many security firms contracted by the U.S. government during the Iraq war. An estimated 25,000 employees of private security firms are working in Iraq, guarding diplomats, reconstruction workers and government officials. As many as 200 are believed to have been killed on the job, according to U.S. congressional reports.

Some Blackwater personnel died in a grisly attack in Iraq more than three years ago that sparked shock and outrage in the United States.

Four Americans working as private security personnel for Blackwater, all of whom were military veterans, were ambushed, killed and mutilated in March 2004 in Falluja, west of Baghdad.

People close to the company estimate it has lost about 30 employees during the war.

Iraqi authorities have issued previous complaints about shootings by private military contractors, the Congressional Research Service reported in July.

"Most recently, a news article discussing an incident in which a Blackwater guard shot dead an Iraqi driver in May 2007 quoted an Iraqi official's statement that the Iraqi Interior Ministry had received four previous complaints of shootings involving Blackwater employees," the congressional service report said.

The Congressional Research Service report cited other concerns, such as "the apparent lack of a practical means to hold contractors accountable under U.S. law for abuses and other transgressions and the possibility that they could be prosecuted by foreign courts."

The reported added, "Iraqi courts do not have jurisdiction to prosecute contractors without the permission of the relevant member country of the Multi-National Forces in Iraq."

Contractors fall under Justice Department and FBI jurisdiction for alleged crimes, said a Pentagon official, who confirmed the accuracy of the congressional report.

Other developments

Seven people were killed and 31 others were detained Monday in U.S.-led coalition raids across Iraq, the U.S. military said. The fatalities occurred west of Yusufiya, southwest of the capital, as coalition forces targeted two buildings used by al Qaeda in Iraq militants, who organize suicide attacks. Troops arrested other suspects in regions north of the capital -- north of Taji, near Balad, in Baiji and near the Syrian border.

Three people were killed and 11 others were wounded Monday in Baghdad when a parked car detonated near a Shiite mosque on the edge of a densely populated Shiite neighborhood, an Interior Ministry official said.